Wellington, May 15 NZPA - Toll Rail, which Australian owner Toll Holdings has agreed to sell to the Government for $665 million, said today it had signed a major contact with dairy giant Fonterra.

The two-year contract is to transport coal from Eastern Coal Holdings Takitimu mine in Southland to Clandeboye, 32km north of Timaru, one of Fonterra's two biggest South Island dairy factories.

But if the coal is to go directly to the plant, a new branch line will have to be built from Ontrack's network - at present the coal sold to the dairy factory by Solid Energy is only railed as far as Temuka, and is trucked from there.

Ontrack has said that funding the branch line would need to be done by other parties. This would potentially include not only Fonterra but the regional council and roading authorities, on the grounds that the rail link could remove huge numbers of truck movementsfrom highways.

And a direct rail connection to the dairy complex, one of the largest in the southern hemisphere, is expected to open up opportunities for Fonterra to move more raw milk between factories for processing efficiencies, to give it more choice in moving product to ports, and to significantly reduce its carbon footprint for transport.

In framing its 10-year rail network development plan to 2015, Ontrack looked at not only building a new branch line to Fonterra's Clandeboye factory, but a better spur line to its equally big dairy factory at Edendale, where it did a lot of work several years ago to cope with the huge expansion of dairying in Southland.

In the Waikato dairying region, Fonterra has taken over 50,000 truck movements off the road by building a huge warehouse at Te Rapa serviced by a rail line, and is now apparently pushing for tunnel heights to be increased on the line from its big Taranaki complex at Hawera, to Te Rapa.

The Canterbury Regional Land Transport Committee, co-ordinated by Environment Canterbury, has previously urged the Government to consider paying for the branch line to Clandeboye, one of Fonterra's biggest manufacturing sites with a processing capacity of over nine million litres of milk a day.

Direct rail links to both the southern mega-sites would not only help with the "import" of fuels and raw milk, but would give the company greater flexibility in being able to switch raw milk to alternative processing plants at the peak of the season, and to improve the costings to be considered when it sends product to ports. When growing pains struck the southern dairy industry in 1999, Edendale was able to send 8.6 million litres of milk north from Southland to be processed at Clandeboye. The new coal supply contract will entail Toll Rail moving about 120,000 tonnes of coal a year. This is expected to be handled by five daily trains a week, with additional capacity available as required.

Toll Rail's general manager, Joe Garbellini, said the deal, which started with the redevelopment of the Takitimu mine during the coming dairy season in September, followed Fonterra transferring its coal supply arrangements to Queensland-owned Eastern Coal Holdings.

In March, Eastern's auditors, PriceWaterhouseCoopers (PWC), said there was significant doubt over Eastern's ability to continue as a going concern because it needed more shareholder funds, and had problems servicing existing and potential supply contracts and achieving cash flows to meet its obligations.

Eastern said its New Zealand bankers had made available a term loan of $3.42 million.

The Takitimu mine, in the Ohai/Nightcaps area, last year sold 12,477 tonnes for $869,715.

Mr Garbellini said Toll had been in close negotiations with Eastern over several months and after an extensive evaluation process continued railing of the coal prevailed as the most sustainable and efficient transport option.

As Toll has previous experience in servicing Fonterra's requirements in this area, he said the switchover to Eastern would create little operational change.

At the time the Fonterra contract to Eastern was announced, Fonterra chief operating officer Barry Bragg said the company would have to downsize its mine at Ohai, where 58 people worked.

The mine, near Takitimu, supplied Fonterra with 100,000 tonnes of coal a year, and its viability was underwritten by the Fonterra contract, he said.